The grim economic outlook has started to hit the world’s airlines, as businesses and consumers begin to cut their travel spending in response to fears of recession.
Softening demand for seats in August and September may signal a new phase of lower bookings for airlines because consumer confidence has dropped sharply, the International Air Transport Association cautioned Wednesday.
The slower pace of growth in passenger traffic is a worrisome indicator for the sector, which is highly sensitive to the economic cycle. Large airlines that rely on business-class traffic for profits were severely hurt during the 2009 recession as corporations curtailed higher-cost travel in tough times, and there are now concerns that carriers will be in for another rough ride in 2012.
Amid the increasingly gloomy forecasts for the economy, investors are losing faith in the sector. Airline stocks have been punished in recent months, especially AMR Corp., the parent of American Airlines Inc., on fears that the Fort Worth, Tex.-based carrier is at risk of filing for Chapter 11 bankruptcy protection. The Bloomberg U.S. airlines index, which tracks AMR and nine other U.S. carriers, has fallen 35 per cent since May 19.
While some airlines are merely experiencing a slowdown in travel growth, others are suffering outright drops in the number of passengers they carry. On Wednesday, an array of carriers reported that their September traffic slipped from a year earlier, notably declines at Delta Air Lines Inc., Republic Airways Holdings and US Airways Group Inc. However, the three U.S. carriers had scaled back their seat capacity, so they saw gains in load factor, or the proportion of seats filled by paying customers.
Last month, IATA predicted that profit at major airlines will dip to $4.9-billion in 2012 from an estimated $6.9-billion this year. But analysts say those forecasts will prove to be far too optimistic should the global economy continue to sputter.
Tony Tyler, IATA’s director-general, sounded the alarm this week about the volatile airline sector. “Airlines are bracing for tough times ahead,” he said in a statement from his Geneva office. “Economic uncertainty owing to the European sovereign debt crisis and the growing likelihood of a protracted period of slow growth in developed economies mean the industry will be even more focused on reducing costs and improving efficiency.”
One potential silver lining for airlines will be lower jet fuel prices, but IATA expressed skepticism. “Weaker economic conditions are reducing oil demand, but supply issues and financial investor demand for commodities are preventing a more significant decline in the price of oil,” IATA said in a newsletter Wednesday.
Some analysts expect the Canadian carriers to weather the economic storm better than many of their foreign rivals, and the latest passenger statistics are far from dire. WestJet Airlines Ltd.’s September load factor fell to 74.7 per cent from 75.5 per cent in the same month of 2010, as its traffic growth couldn’t keep pace with expansion. Air Canada and Porter Airlines Inc., however, enjoyed increases in traffic and load factor last month.
National Bank Financial Inc. analyst Cameron Doerksen said WestJet has lower operating costs than Air Canada, so the Calgary-based carrier will still have an edge in an economic downturn.
Airlines with single-class cabins, such as WestJet, will be able to target cost-conscious travellers by offering competitive fares in economy class, industry observers say.
“An early indicator of weakness in air travel would be declining airfares,” Mr. Doerksen said in a research note. “Although we have seen some select fare discounting over the past month in our weekly fare surveys, overall ticket prices we track remain higher versus a year ago.”
Since the beginning of 2011, Air Canada shares have tumbled 61 per cent to $1.33, while WestJet shares have decreased 11 per cent to $12.46.
“September saw equity markets fall worldwide, but airline stocks were marked down more than other sectors, as financial markets judged airline profits would be hit hardest by deteriorating economic conditions,” IATA said.
The organization, which represents major global carriers, also noted that cargo shipments by plane are declining, reflecting “failing world trade and deteriorating economic conditions.”